Exemption of Bonds in States

May 24, 2013

Reciprocal State Tax Exemption:

See Kentucky v. Davis for a discussion of whether it was unconstitutional for the Commonwealth of Kentucky to exempt its own bonds but not automatically exempt bonds issued by other states. The Supreme Court determined that each state may make its own determination of whether or not to exempt other states’ bonds. The Justice writing the court’s opinion had the following to say in his introduction: “For the better part of two centuries States and their political subdivisions have issued bonds for public purposes, and for nearly half that time some States have exempted interest on their own bonds from their state income taxes, which are imposed on bond interest from other States. The question here is whether Kentucky’s version of this differential tax scheme offends the Commerce Clause. We hold that it does not.”  What this means is that there is no automatic exemption of one state’s bonds in another state. Exemption of one state’s bonds in another state would depend on that other state’s statutes.

Article X, Section 20 of the Colorado Constitution (“TABOR”) Matters

May 17, 2012

Relevant Case Law:

Bickel v. City of Boulder, 885 P.2d 215 (Colo. S. Ct. 1994):  Appeal by plaintiff seeking declaratory and injunctive relief and the invalidation of several ballot issues proposed by the defendants. At issue are ballot titles and matters concerning approval of consolidated debt and tax increases, approval of unlimited general obligation bonds, exemption from future voter approval of tax rate increases, failure to include the text of the ballot issue in the election notice and failure to include in the election notice a proper estimate of the district’s first full fiscal year spending.  Quote: “Unlike the federal constitution which grants powers, state constitutions, including Colorado’s, are documents of limitation.”

Boulder v. Dougherty, 890 P.2d 199 (Colo. App. 1994):  Defendant claimed that equipment lease-purchase agreement and related instruments violated TABOR.  The court of appeals affirms the district court’s decision that the agreement does not violate TABOR.  Issue: Does the agreement create a multiple fiscal year direct or indirect district debt or other financial obligation whatsoever?  The defendant had agreed to purchase Certificates of Participation evidencing proportionate rights in the agreement, but then backed out, claiming that the agreement violated TABOR because (1) TABOR is worded as broadly as possible to include all multiple-fiscal year financial obligations, (2) the agreement is a multiple-fiscal year financial obligation, (3) TABOR supersedes prior case law to the contrary, (4) TABOR should be given the interpretation that most restrains growth in government, and (5) the promoters  of TABOR intended it to apply to lease-purchase transactions.  Case summarizes the pre-TABOR Gude v. City of Lakewood (636 P.2d 691 (Colo. 1981)) case (stating “to constitute debt in the constitutional sense, one legislature, in effect, must obligate a future legislature to appropriate funds to discharge the debt created by the first legislature’).  The Dougherty case is a case of first impression relating to lease purchase agreements in the post-TABOR era.  Quote: “Doughty also argues that any interest earned on the certificates of participation are being represented as tax free pursuant to the Internal Revenue Code which is true only if the Agreement constitutes an obligation of a state or political subdivision thereof.  This argument, even if correct, is of no assistance.  The Internal Revenue Code does not control the interpretation of the Constitution of the State of Colorado.  In addition, whether or not the interest income derived from the Agreement is tax free is a risk assumed by Dougherty, or any investor concerning which we express no opinion.  Whether the interest on this, or any similar, transaction is tax free will affect the financial benefit contemplated by all parties, but it has no impact upon our interpretation of the Colorado Constitution.”

State of Colorado Tax Exemption, Other Matters

December 14, 2010

Exemption basis for Colorado Tax:

Express exemption for Special District revenue bonds: Section 32-1-1101(1)(d), C.R.S.

No express exemption for Special District general obligation bonds.

Specific Ownership Tax:

The specific ownership tax is a property or ad valorem tax that is levied in addition to sales (or use) taxes on a motor vehicle and is paid annually when the vehicle is registered within a county.  See this Colorado Legislative Council Staff memorandum for more information.

Public Improvement Fees:

A public improvement fee (a “PIF”) is a privately imposed sales tax.  The fee is imposed by the owner of real property recording a covenant on the property which requires subsequent owners or tenants to impose the fee on retail sales.  PIFs arise in part because of the requirement under TABOR to vote sales tax sharing agreements that extend beyond one year.  Prior to TABOR, sales tax sharing agreements with governmental entities were typically entered into to assist in the financing of new developments – after TABOR, these tax sharing agreements require an election.  PIFs do not.

There are two types of PIFs: (1) In lieu of PIFs or credit PIFs; and (2) Add-on PIFs that are in addition to the municipal sales tax.  In connection with the in lieu of PIF, the developer asks the municipality to adopt an ordinance granting a credit against the municipal sales tax such that the consumer pays part of the total sales tax of, e.g., 4%, in the form of the actual sales tax to the municipality of 2% and in the form of the in lieu of PIF to the developer in the amount of 2%.  The add-on PIF is collected in addition to the municipal sales tax.